by International business refers to the conduct of trade and investment activities by companies across national borders. It involves all commercial transactions—including sales, investments, and logistics—that take place between two or more nations. Unlike domestic business, it subjects firms to different currencies, legal systems, cultures, and market conditions. It encompasses a wide spectrum, from a small company importing raw materials to a multinational corporation establishing a factory overseas.
Definitions of International Business
- According to Daniels and Radebaugh
“International business includes all business transactions that involve two or more countries. These transactions can be undertaken by private firms or government bodies, and include sales, investments, and transportation.”
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According to John D. Daniels
“International business encompasses the full range of cross-border exchanges of goods, services, or resources between two or more nations. These exchanges can go beyond the exchange of money for physical goods to include international transfers of other resources, such as people, intellectual property, and contractual assets or liabilities.”
Various Forms of International Business
1. Trade-Based Entry Modes: Importing and Exporting
This category represents the foundational level of international business, involving the direct exchange of goods and services across borders. It requires the least commitment in terms of investment in the target country.
(a) Exporting
Exporting is the process of selling goods or services produced in the home country to customers in another country. It is often the first step for companies venturing into international markets due to its relative simplicity and lower risk .
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Direct Exporting: The company sells directly to an importer or end-user in the foreign market. This requires the company to manage the logistics, marketing, and sales process itself or through its own dedicated team. While it demands more effort and resources, it offers greater control over branding, pricing, and customer relationships, and can lead to higher profit margins .
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Indirect Exporting: The company sells its products to an intermediary based in its home country, such as an export management company (EMC), a trading company, or a broker. This intermediary then takes responsibility for selling and shipping the goods overseas. This route is ideal for companies with limited international experience or resources, as it minimizes risk and requires no foreign market expertise. However, the producer loses control over how its product is marketed and sold abroad .
(b) Importing
Importing is the flip side of exporting, involving the purchase of goods or services from a foreign source and bringing them into the home country. Companies import to access raw materials, components, finished products, or services that are either unavailable, more expensive, or of lower quality domestically . For example, a U.S. furniture manufacturer might import specialty hardwood from Brazil, or a tech company might import assembled components from China.
Advantages of Trade-Based Modes:
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Low Financial Risk: Minimal upfront investment in foreign assets.
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Speed and Simplicity: The fastest way to enter a new market.
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Flexibility: Easy to scale up or down, or even exit a market, based on demand .
Disadvantages of Trade-Based Modes:
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Lack of Control: Limited influence over marketing, pricing, and distribution in the foreign market.
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Trade Barriers: Susceptibility to tariffs, quotas, and other import/export restrictions that can increase costs and reduce competitiveness .
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Logistical Complexities: Exposure to risks related to international shipping, currency fluctuations, and supply chain disruptions .
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Limited Market Knowledge: The company remains distant from its end customers, making it harder to understand local preferences and build brand loyalty .
2. Contractual Entry Modes: Leveraging Intellectual Property and Capabilities
These modes involve a contractual agreement between a firm in one country and a firm in another, allowing the latter to use the former’s intellectual property, business model, or production capabilities. They offer a way to expand with limited capital investment.
(a) Licensing
Licensing is a contractual arrangement in which a firm (the licensor) grants another firm (the licensee) in a foreign country the right to use its intellectual property—such as patents, trademarks, copyrights, technology, or production processes—for a specified period. In exchange, the licensee pays a fee, typically a royalty based on a percentage of sales .
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Example: A sportswear company could license its brand name and logo to a foreign apparel manufacturer, allowing them to produce and sell a line of clothing in their local market.
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Advantages: It requires little capital investment, provides a relatively low-risk source of royalty income, and allows the licensor to bypass trade barriers.
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Disadvantages: The licensor cedes significant control over production and marketing quality, which can harm its brand reputation if the licensee underperforms. There is also a risk of creating a future competitor, as the licensee gains valuable expertise and could potentially develop its own competing products after the agreement expires .
(b) Franchising
Franchising is a specialized form of licensing. The franchisor not only grants the right to use its trademark and brand name but also provides a complete business model, including operational procedures, marketing materials, and ongoing support. The franchisee, in turn, agrees to operate according to these strict guidelines and pays an initial fee and ongoing royalties . This model is prevalent in the fast-food, hotel, and retail service industries .
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Example: McDonald’s is a classic example. Its global expansion has been driven largely by franchising, where local entrepreneurs invest in and operate restaurants according to McDonald’s proven systems .
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Advantages: It enables very rapid global expansion with significantly less capital investment than company-owned stores. Franchisees, being local investors, bring entrepreneurial drive and local market knowledge .
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Disadvantages: Maintaining consistent quality and customer experience across thousands of diverse locations is a monumental challenge. Cultural, legal, and operational conflicts can arise between franchisor and franchisee, potentially damaging the brand .
(c) Contract Manufacturing (Outsourcing)
This is a form of outsourcing where a company contracts with a foreign firm to manufacture products or provide services according to its specifications. The contracting company retains control over product design, development, and marketing, while the foreign manufacturer handles the production process . This is often driven by the desire to reduce labor costs.
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Example: Many American fashion brands design their clothes in the U.S. but have them manufactured in countries like Vietnam, Bangladesh, or China to take advantage of lower production costs.
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Beyond Manufacturing: This model has expanded dramatically into services. For instance, a U.S. insurance company might outsource its claims processing to a firm in India, or a software company might hire developers in Eastern Europe .
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Advantages: Significant cost savings on labor and production, allows the company to focus on its core competencies like design and marketing, and provides flexibility in scaling production.
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Disadvantages: It can lead to quality control issues, ethical concerns over labor practices in the supplier’s country, and vulnerability to supply chain disruptions. It also makes the company reliant on a partner and can be politically sensitive due to job losses at home .
3. Collaborative Entry Modes: Partnerships and Shared Ventures
These strategies involve partnering with a foreign entity to pool resources, share risks, and combine strengths for a common goal. They represent a deeper level of commitment than purely contractual arrangements.
(a) Strategic Alliances
A strategic alliance is a cooperative agreement between two or more independent companies to work together on a specific project or business activity. It is a flexible arrangement that falls short of a formal partnership with joint ownership. The partners contribute resources such as technology, distribution networks, or market access for mutual benefit .
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Purpose: Alliances can be formed for various reasons, including enhancing marketing efforts, sharing technology, co-developing new products, or entering new markets .
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Example: A Korean automaker might form a strategic alliance with a California-based tech startup to jointly develop electric vehicles, combining manufacturing expertise with innovative technology .
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Advantages: Flexibility, relatively low cost, and quick access to a partner’s capabilities or market without a major long-term commitment.
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Disadvantages: Can suffer from a lack of clear direction, misaligned goals between partners, and difficulties in managing the collaboration, especially if contributions or benefits become uneven .
(b) Joint Ventures (JV)
A joint venture is a specific type of strategic alliance that involves the creation of a new, legally independent entity by two or more parent companies. The partners share the equity, risks, rewards, and management of the new venture . JVs are often pursued when a company needs a strong local partner to navigate a foreign market’s regulatory, cultural, or business landscape.
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Motives for JVs: These include sharing the high costs and risks of a new project, gaining instant access to a partner’s local market knowledge and distribution networks, and complying with local laws that mandate foreign ownership limits .
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Example: An Indonesian car manufacturer might form a joint venture with a Japanese automaker like Toyota to produce vehicles for the Indonesian market, combining local production facilities with Japanese technology and global brand recognition .
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Advantages: Shared financial burden and risk, immediate access to local expertise and relationships, and the potential for powerful synergies.
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Disadvantages: Potential for conflict between partners over strategy, profit distribution, and management control. Cultural clashes and differing corporate governance standards can also create friction. A successful JV requires careful planning, aligned objectives, and a well-defined governance structure from the outset . Experience in managing such partnerships is a key driver of success .
4. Hierarchical Entry Modes: Foreign Direct Investment (FDI)
This represents the deepest level of commitment and involvement in a foreign market. FDI involves a firm investing directly in facilities and operations in another country, establishing a controlling ownership stake .
(a) Greenfield Investment
This is the most complex and costly form of FDI. A parent company starts a wholly new operation in a foreign country from the ground up, constructing new production facilities, offices, and systems .
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Example: When Tesla decided to build its Gigafactory in Berlin, it was a massive greenfield investment, creating a new manufacturing hub from scratch, tailored to its exact specifications.
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Advantages: Provides the parent company with maximum control over operations, quality, culture, and technology. It allows the firm to build exactly the facilities it needs without inheriting any “legacy” problems from an acquired company .
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Disadvantages: It is the most time-consuming, capital-intensive, and risky entry mode. It requires navigating complex local regulations, building relationships from zero, and a long patience before seeing returns .
(b) Mergers and Acquisitions (M&A)
This involves acquiring an existing firm in the target country or merging with it to form a new combined entity. This is a faster way to gain a significant presence in a market .
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Example: When a large European pharmaceutical company acquires a smaller American biotech firm, it instantly gains access to its new products, research team, and U.S. market infrastructure.
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Advantages: Offers the quickest path to a substantial market share, immediate access to established distribution networks, local brand recognition, and an existing workforce .
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Disadvantages: It can be very expensive and fraught with risks. Integrating two different corporate cultures, IT systems, and management styles can be extremely difficult. There is also a risk of inheriting unknown liabilities, such as legal disputes or financial problems, from the acquired company .
(c) Wholly-Owned Subsidiary
This is the result of either a greenfield investment or an acquisition. A wholly-owned subsidiary is an independent company owned entirely by a parent company (the parent) in another country . It operates under the host country’s laws but is under the complete financial and managerial control of the parent.
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Example: IBM Japan is a wholly-owned subsidiary of the U.S.-based IBM corporation. While it operates as a Japanese company with local employees, its strategic direction is set by the global parent .
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Advantages: The parent company retains absolute control over its technology, operations, and strategy. It can fully integrate the subsidiary into its global strategy and capture all the profits .
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Disadvantages: This mode carries the highest level of risk and financial exposure. The parent company is solely responsible for all investments and liabilities in the foreign market .
5. Other Specialized Forms
(a) Turnkey Projects
Common in industries like construction, chemicals, and pharmaceuticals, a turnkey project is a contract under which a firm agrees to fully design, construct, and equip a facility and then turn the project over to the purchaser when it is ready for operation. The contractor is responsible for every detail, from feasibility studies to training local staff.
(b) Management Contracts
This is an arrangement where one firm provides managerial know-how and expertise to another firm in a foreign country for a fee. The local firm retains ownership, while the international firm manages the day-to-day operations. This is common in the hotel industry (e.g., Marriott managing a hotel owned by a local company) and in privatized state-owned enterprises.
(c) International Portfolio Investment (FPI)
This is a passive form of investment. Instead of seeking control, investors purchase foreign financial assets like stocks and bonds. The goal is to achieve a financial return through dividends or interest, not to manage the foreign company’s operations. While it brings capital into a country, it does not involve the transfer of technology, management expertise, or long-term commitment characteristic of FDI . FPI is more volatile, as investors can quickly sell their holdings and exit the market .
